In the lending world, there are many different types of loans available. Each depends on who you are borrowing from, what you are doing with the funds you borrow, and your credit score or borrowing credentials. A bridge loan is a type of loan that is financed short-term, and it is meant to only be taken out until a more permanent type of loan can be secured. There are both advantages and disadvantages to taking out a bridge loan, depending on your individual circumstances. If you need money quickly and you don’t qualify for other lending products, a bridge loan might be your best option.
What is a Bridge Loan?
A bridge loan is a type of product that people or companies use to secure finances until they can find a more permanent lending scenario or their financial obligation is fulfilled. It provides immediate cash for people who either don’t have the time or the credentials to borrow money using more traditional loan products. Bridge loans are taken out for a short time, only up to one year, and they typically come with higher interest rates than other loans. Also, bridge loans are usually backed by collateral, such as inventory or real estate. Bridge loans are available to some homeowners who want to purchase a newer home while their home is on the market.
How Do Bridge Loans Work?
Bridge loans are also known as swing loans, gap financing, and interim financing because they are used when people or companies need to act quickly but might not be able to get permanent financing. Both corporations and individuals can take out bridge loans, and they are customized to suit the borrower’s needs and for many different scenarios.
An example of where a bridge loan is helpful is when a homeowner has their house on the market waiting for it to sell. They can use the equity that they have in their current home as a down payment for a new one until they can sell their old home. A gap or bridge loan gives them the resources they need to buy another home quickly, and then to finance it more permanently once they sell their home.
Bridge Loans Versus Traditional Loans
The main advantage of taking out a bridge loan is that the application process is typically much faster than when you choose a more traditional loan. The tradeoff, however, is usually a much higher interest rate, shorter lending terms, and considerable origination fees. Borrowers are more likely to pay the additional charges because it gives them the flexibility they need to act fast to secure their new home purchase. For corporations, a bridge loan gives them the resources they need immediately and don’t have the capital to pay for at the moment. The key feature of a bridge loan is that it is short-term, so the faster you pay it off, the less you pay in interest charges. Typically, they do not come with prepayment penalties, which can be a huge benefit.
There are times in life when people or companies need to act quickly to make a significant purchase that they might not have the immediate resources for. A bridge loan is an excellent way to secure financing quickly, without having to jump through the hoops to get a traditional loan product.
Although they come with the disadvantages of higher interest rates, shorter repayment terms, and high origination fees, if you pay them off as expected, they can really be a helpful tool in the interim until you can get your finances in order. If you are having a hard time securing a traditional loan, Homespring Mortgage is here to help. We find solutions where others see roadblocks. Contact us today and let’s get you the money you need when you need it most.